It’s not your imagination
It really is getting harder to make ends meet. While the average income has gone up 28% over the last 13 yrs, the cost of living has increased almost 31%. But it’s even worse than that: during that same period, the cost of medical care care has gone up 57% and food costs have gone up nearly 40%. That means that it’s becoming more difficult to stay out of debt. And that’s why now, more than ever, it is important to make it a priority to free yourself from the chains of debt.
The time is now
Make it a goal this month to retire a portion of your debt. There are two reasons that I make this a goal at the beginning of the year. First, to give us a fresh start at the new year. And second, because this is tax season, when most of us expect to receive a tax return. Use your tax return to pay a bill down. If your tax return is not enough to pay the whole bill off, pay as much off as you can. And then make double payments until the debt is paid off. Choose the smallest bill you have such as a credit card bill, hospital bill or car loan. Paying off your smallest debt first gives you a sense of control over your money and is the first step to the snowballing system of debt elimination.
Are your tax returns too big?
The average tax return is $3000. That’s $250 that is missing out of each month’s budget. Many people don’t mind getting that windfall each spring. But remember: that is money that did not earn any interest and, indeed, over a year’s time actually lost some value.
If you really want a first-of-the-year bonus check, you are better off setting up a direct deposit that puts $250 from your paycheck into a saving’s account. Then in January, use the money that you saved up. It’s just like getting a nice, fat tax return, except this one earns interest.
Adjust W-4 exemptions so that next year’s tax return is as close to zero as you can make it.
Use this calculator to see what your W-3 exemptions should be.
But isn’t debt a good thing?
Some experts say that debt is a tool that creates prosperity. But economic adviser Dave Ramsey says this is a myth. “Debt brings on enough risk to offset any advantage that could be gained through leverage of debt. Given time—a lifetime—risk will destroy the perceived returns purported by the myth-sayers.” If you want a good start on debt elimination, you really should start with Dave Ramsey’s website. This site has lots of great articles, online tools and ideas for teaching kids about managing money.
Why live debt free?
There are many reasons to live debt free. When you are free from debt you are also free to make career choices are not debt-driven. Without the worry of debt, you can focus on savings and might be able to retire earlier. And of course, you will experience less anxiety, knowing that financial disaster is not a huge concern.
Living debt free also changes your perspective. You are able to better focus on what really matters, rather than be burdened by materialism. When you make purchasing decisions you will focus on need, functionality and value.
People with debt:
Have an increase in depression, anxiety and the complications that come from stress such as insomnia, high blood pressure, inability to concentrate.
Have an increase in stress-related health problems such as back pain, migraines and heart attacks.
Choose to have babies later and have fewer children.
Postpone buying a home.
Have a higher rate of divorce.
Are less involved in community building such as volunteering, contributing to school and government and participating in cultural events.
May find their children’s college and career choices are limited.
Savings is also important
Besides paying off your debt, you should work towards putting enough into savings to pay for household expenses for 3-6 months. Many experts advise that you should get this savings cushion in place before paying off credit card and student loan debt or saving for the down payment on your future dream home. Why? Because if a financial emergency strikes, having even a small cushion could help lessen the chances that you’ll turn to your credit card—and add to the debt you may be diligently trying to pay off.
For some, a three month savings is sufficient, but for others a six month cushion may not be enough. There are several factors to determine how much you should have in savings: Some of the factors to consider when deciding how much you should have in savings include:
- whether you own your home or rent
- if you have more than one source of income
- if you have family or others who can help you through a financial emergency
- job stability and skill marketability
Include your children
Include your children in this month’s goal. Teach your children how to budget and stay out of debt. When you do this, you and your children will reap the many benefits of living frugally. Help them to establish a system for saving. You could get them a saving’s account set up or just set up a savings piggy bank—a bank that is divided into three segments: one for tithes, one for spending and a third for saving.
Beginning this month, make debt elimination a priority. There are lots of websites with advice and plans that will help you get out of debt. You may want to start with this Debt Elimination Calculator, an interactive calculator that will help you find the best places to start paying down debt.
If you are debt-free, commit to a frugal lifestyle that will allow you to begin a saving plan. You should have enough cash reserve to see you through 3-6 months of unemployment.
You won’t get there this month, but with a patient commitment to living on less, you will eventually find yourself debt free and on your way to accumulating a healthy emergency fund